Accounting for Share Capital

A company is an artificial person created by law, with a separate legal entity, perpetual succession, and limited liability. It raises capital by issuing shares to the public.

Types of Share Capital

1. Authorised (Registered/Nominal) Capital — Maximum capital a company can issue, as stated in its Memorandum of Association.
2. Issued Capital — Part of authorised capital actually offered to the public.
3. Subscribed Capital — Part of issued capital actually taken up (subscribed) by the public.
4. Called-up Capital — Part of subscribed capital that the company has demanded from shareholders.
5. Paid-up Capital — Part of called-up capital actually paid by shareholders.
6. Reserve Capital — Portion of uncalled capital reserved for calling only on winding up of the company.

Types of Shares

• 1. Equity (Ordinary) Shares:
• Carry voting rights
• Dividend depends on profits and board decision
• Higher risk, higher potential return
• Get residual assets on liquidation

• 2. Preference Shares:
• Preferential right to dividend (fixed rate)
• Preferential right to repayment of capital on winding up
• May be cumulative/non-cumulative, redeemable/irredeemable, participating/non-participating

Issue of Shares at Par, Premium and Discount

• At Par — Issue price = Face value (e.g., Rs 10 share issued at Rs 10)
• At Premium — Issue price > Face value (e.g., Rs 10 share issued at Rs 15; premium = Rs 5)
• Premium is credited to Securities Premium Reserve A/c (cannot be used as dividend)
• At Discount — Issue price < Face value (e.g., Rs 10 share issued at Rs 9); allowed ONLY in special circumstances under Section 53 of Companies Act, 2013 (practically abolished)

Procedure for Issue of Shares

1. 1.Prospectus issued; public applies (Application stage)
2. 2.Application money received — Bank A/c Dr; To Share Application A/c Cr
3. 3.Board allots shares — Share Application A/c Dr; To Share Capital A/c Cr (for allotment)
4. 4.Excess application money: Refunded or adjusted towards Allotment/Calls
5. 5.Allotment money called: Share Allotment A/c Dr; To Share Capital A/c (and To Securities Premium if premium)
6. 6.Allotment received: Bank A/c Dr; To Share Allotment A/c Cr
7. 7.First/Final Call: Share First Call A/c Dr; To Share Capital A/c Cr
8. 8.Call received: Bank A/c Dr; To Share First Call A/c Cr

Over-subscription and Under-subscription

• Over-subscription — more applications received than shares available. Some rejected (money refunded); some partly allotted; excess adjusted to allotment.
• Under-subscription — fewer applications than shares available. Issue goes through if minimum subscription (90% of issued capital) is received.

Calls in Arrears and Advance

• Calls in Arrears — money due but NOT paid by shareholders on allotment or calls
• Interest @ 10% p.a. (or as per AOA) charged to defaulting shareholders
• Calls in Advance — money paid by shareholders before the call is made
• Interest @ 12% p.a. (or as per AOA) paid by company to shareholders

Forfeiture of Shares

When a shareholder fails to pay allotment or call money, the company can forfeit their shares after due notice.

Journal Entry for Forfeiture (shares issued at par):
Share Capital A/c Dr (called-up amount per share x no. of shares forfeited)
To Calls in Arrears A/c (amount unpaid)
To Share Forfeiture A/c (amount received before forfeiture)

Re-issue of Forfeited Shares

Forfeited shares may be re-issued at par, premium, or discount (but discount cannot exceed amount forfeited).

Journal Entry for Re-issue:
Bank A/c Dr (amount received on re-issue)
Share Forfeiture A/c Dr (discount allowed = amount forfeited - re-issue price below par)
To Share Capital A/c (paid-up value)

Profit on re-issue (excess in Share Forfeiture A/c after re-issue) is transferred to Capital Reserve.
Share Forfeiture A/c Dr; To Capital Reserve A/c

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· Application: · Bank A/c Dr 30,000; To Share Application A/c 30,000 · Allotment of shares: · Share Application A/c Dr 30,000; To Share Capital A/c 30,000 · Allotment due: · Share Allotment A/c Dr 40,000; To Share Capital A/c 40,000 · Allotment received: · Bank A/c Dr 40,000; To Share Allotment A/c 40,000

· Allotment due: · Share Allotment A/c Dr 25,000
To Share Capital A/c 5,000 (Rs 1 capital portion per share)
To Securities Premium Reserve A/c 20,000 (Rs 4 x 5,000)

· Steps: · Refund to fully rejected: excess applications x application money per share.
Pro-rata applicants: adjusted excess toward allotment. Entry for excess adjusted:
Share Application A/c Dr (excess adjusted)
To Share Allotment A/c (adjusted to next call)

· Called-up per share · = Rs 10. Paid = Rs 3. Unpaid = Rs 7.
Share Capital A/c Dr 2,000 (200 x Rs 10)
To Calls in Arrears A/c 1,400 (200 x Rs 7)
To Share Forfeiture A/c 600 (200 x Rs 3)

Bank A/c Dr 1,600 (200 x Rs 8)
Share Forfeiture A/c Dr 400 (discount = 200 x Rs 2)
To Share Capital A/c 2,000
Remaining forfeiture credit = 600 - 400 = Rs 200 → Capital Reserve
Share Forfeiture A/c Dr 200; To Capital Reserve A/c 200

| Feature | Calls in Arrears | Calls in Advance |
|---|---|---|
| Meaning | Money due but not paid | Money paid before being called |
| Treatment | Deducted from called-up capital | Added to paid-up capital temporarily |
| Interest charged | 10% p.a. (from company's perspective, received from shareholder) | 12% p.a. paid by company to shareholder |

· Forfeiture: · Share Capital A/c Dr 5,000; Securities Premium Reserve A/c Dr 1,000 (if premium not paid)
To Calls in Arrears 1,000; To Share Forfeiture 5,000. Wait — simplify: forfeited amount received = Rs 8 x 500 = Rs 4,000. · Re-issue at Rs 9: · Bank 4,500; To Share Capital 5,000; Share Forfeiture A/c Dr 500.
Remaining in Share Forfeiture = 4,000 - 500 = Rs 3,500 → Capital Reserve.